Harris: Crown family sides with activist hedge fund on PetSmart

The investment arm of Chicago's billionaire Crown family has thrown its weight behind a New York-based activist hedge fund in its calls for retailer PetSmart to sell itself, a rare public rebuke of a company the family invests in.

In a Monday letter to PetSmart's board, Chicago-based Longview Asset Management, run by Crown family member James Star, argued that, because of cheap debt, conditions were right for a buyout and that "fending off" hedge fund Jana Partners would "distract" PetSmart employees and "erode business value."

"We have previously shared with Company management and directors our concerns regarding the Company," Star said in the letter. "These private conversations did not advocate for a possible sale transaction. Now that Jana has raised the possibility of a sale and that prominent brokerage firms have suggested that PetSmart is 'in play,' we believe the Board should consider this path…"

Jana and the Crowns are unlikely bedfellows — an alliance between one of the pushiest hedge fund managers in the business and a family known for settling disputes privately and holding stock positions, in at least one case, for more than a half-century.

The Crowns' stake in the retailer, which dates to 2005, represented 9 percent of the company's value, or about $613.9 million as of late Tuesday.

The Crown family also holds large stakes in Wall Street's JPMorgan Chase; road and farm maintenance equipment manufacturer Alamo Group; heat-tracing company Thermon Group Holdings; and defense contractor General Dynamics, among others. Its stake in General Dynamics dates to 1959, when Henry Crown merged his Material Service Corp. with the defense contractor.

Such a long holding is possible for the family, among the richest in the country, because it does not need cash. And taking the long view — the concept is even embedded in the firm's name — makes this call for a sale of PetSmart all the more unusual.

Until Jana announced a 9.99 percent stake in the company and called for changes last week, PetSmart's shares had been on a dive, declining to a low of $55.30 in late May after opening at $72.35 at the beginning of the year.

That doesn't mean PetSmart hasn't been a winner for Longview. The stock opened 2005 at $35.56 a share. It closed Wednesday at $70.55.

New York-based Jana, run by Barry Rosenstein, has become a familiar name in Chicago business circles.

Jana took a large position in the parent company of Dominick's last year and then called for it to shutter operations in lower-margin markets, such as Chicago, which ultimately happened.

Jana also has taken a position in Walgreen Co. and called for that company to move its corporate headquarters to Europe as a tax-saving measure. That proposal is under consideration.

Jana is now PetSmart's largest shareholder.

While all publicly listed companies are answerable to shareholders, activist investors, such as Rosenstein, are far more hands-on. Among the most well-known activists are billionaire hedge fund managers Carl Icahn and William Ackman, who use the media to publicly clamor for underperforming companies to change direction.

When the companies submit to the activists' demands, their stock prices often pop. Then the activists sell some or all of their stake, benefiting from the run-up they caused. On the other hand, activists often target companies that are underperforming, pushing for changes that are necessary but unpopular with insiders.

"One of the reasons the stock price has declined was because of a concern that PetSmart is facing increased competition from general merchants, such as Wal-Mart and grocery stores, as well as online retailers," said LiangFeng, a Chicago-based equity analyst at Morningstar. "But our view is that a 20-pound bag of pet food is not an e-commerce-friendly category."

That doesn't mean that the retailer isn't being undercut on pet toys and other hard goods, which cost less to ship, Feng said.